The Credit Crunch Finally Hit Me

In last week’s post Emergency-Proof Your Emergency Fund, I said I decided to apply for an unsecured personal line of credit from Wells Fargo, where I also have a checking account.

I submitted the application online. The questions were as expected: name, address, Social Security Number, employment information, income, size of the credit line requested, and the purpose of borrowing. They said a decision typically takes two business hours. I waited all day but I didn’t hear anything. I finally called and they said my application was declined! If you can believe it, they asked me if I would like to be referred to Wells Fargo Financial, their subprime unit. Me? Subprime? No, thank you.

The underwriter said the reason for the decline was that the size of the credit line I asked for was too high for my income. Fine, tell me what you can give me. No, they just flat out declined me. It’s been widely reported that credit card companies are cutting people’s credit limits. They have spared me so far. Ah, the credit crunch finally hit me.

Because having a line of credit linked to a checking account is part of my carefully designed strategy for emergency-proofing my emergency fund, I swallowed my ego and pride and had a phone rep appeal my case with the underwriter. After a few rounds of phone calls, I finally got it approved with the lowest credit line they can give to anybody for that product. It’s an acceptable starting point. I can have them raise the credit limit later after the credit crunch passes.

The phone rep told me the underwriter couldn’t give me a higher credit line because I already have plenty of credit available to me from my three credit cards. The underwriter said if I were to max out on all my credit cards, the required payments would be too high for my income. That actually makes sense, although the credit limits on my three cards are quite modest compared to what others said they had. Perhaps that’s the reason none of the credit card companies cut the credit limit on my cards. I see fellow blogger Sun has over $200,000 combined credit limits from 9 credit cards. When I asked How Long Can You Live On Your Credit Cards? last January, a reader said he or she could live six years just on credit cards. I can live only six months on my credit cards. Those credit card companies are much more trusting than my Wells Fargo underwriter. Maybe the conservative nature of Wells Fargo is a reason why Wells Fargo is a relatively strong bank.

Everybody says you should have your credit limits as high as possible to keep your utilization ratio low and your credit score high. This experience shows that having high credit limits can prevent you from getting new credit elsewhere. Because I just refinanced my mortgage, I saw my credit scores (790). I know they declined me initially not because of my credit scores. It’s an issue of maximum potential debt to income ratio.

For my low credit line, I also had to fax in a bunch of documents: W-2, paystubs, and utility bill. I never had to do it before for any credit card application. It’s a small inconvenience for me to gather the documents and fax them, but I think all credit applications should be done this way. Applying for credit is a serious business. We shouldn’t make it too easy. I do wonder why a personal line of credit is so much more difficult to get than a credit card. A personal line of credit is treated as a real loan and looked at by a real person. Credit card applications are typically decided by automated systems with instant approval. Professor Adam Levitin of Georgetown University wrote in his blog post Credit Card Defaults–Piggybacked Underwriting:

"There is virtually no income verification in the [credit] card industry–all loans are stated income loans (a/k/a liar loans), and we know how well that worked for mortgages (and there’s more temptation to lie about a card as a default won’t cost you the house)."

I don’t know why they do full doc loans for a personal line of credit while they do stated income loans for credit cards. I’m guessing it’s because with a credit card they can price for risk and adjust rates more easily down the road. If any banker reads this, please chime in.

After all these run-ins with the bank, I’m thinking what it takes to establish a relationship with a personal banker at a branch. Instead of calling different departments at different 800 numbers, getting a different phone rep every time I call, and repeating what I said each time, I could let the banker at the branch make the calls for me. I heard that’s how banking was done in the old days. A local banker knew you and served you. Now everybody self-serves online or calls the call center a thousand miles away or across the globe. I know Wells Fargo is known in the industry for relationship banking. Getting help from a banker for a single point of contact will probably make things easier for me. I will inquire when I go into a branch next time.

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Comments

The credit crunch didn’t hit you. Common sense in lending hit you. How refreshing it is to learn of a lender that actually did some real underwriting and did not extend you credit merely on a high credit score. We need more of this. Anyone who can live 6 years on credit cards was extended way too much credit. That is the fault of all concerned.

I have to agree with Mr. Tough – it’s very good news to my ears that a lender was being informed about their decisions.

I’ve only recently learned just how credit scores are determined, and it’s a joke to me. Actually having a lot of potential debt is a reason to give someone more potential debt? Really? Without even factoring in their income? I would argue that anyone not knowledgeable on this idea would naturally think the opposite, and it’s only after they give in to the “way it is” do they tend to defend the idea – did anyone really think this was a good indicator of smart lending when they first heard it?

“I do wonder why a personal line of credit is so much more difficult to get than a credit card” – you hit the nail on the head: because a personal line of credit was always meant to be a real (meaning smart and informed) loan – credit card companies turned that concept into a veil for a money-making scheme, where they plan out the amount of defaults they can take and decide it’s worth it anyway. They are not the same.

I also hope more people start to realize what you did – that personal relationships really can trump “when banks compete, you win” over the long haul. Don’t get me wrong, competition is good, but forcing the highest level of competition often only serves to run all competitors into the ground.

No one effectively restricted the amount of cash banks had to have on hand to collateralize their investment activities. No one seems to have rated the banks’ ability to fund their own speculative investing. The only means for banks to remain solvent (which is arguable) have been the TARP funds and increases in cash receipts from credit card debtors. The unrestricted ability of banks to increase fee income for services formerly not charged to their cardholders and to increase interest rates on purchases and cash advances, If a bank decides unilaterally to charge card holders $0.35 for each borrowed dollar, the terms and conditions leave no room for negotiation or for a timely, simple appeal process. If credit card use were priced, then the price of use inflated 35 percent. Any product or service paid for by credit card rose 35 percent after the transaction. That is what has caused consumer shock and business failures.

Ongoing, personal banking relationships normally require a person to maintain a level of business with the bank, such as savings accounts or CDs, exceeding $100,000 except in rare situations. For the majority of their customers, banks do not have the staff with whom to establish a personal banking relationshiip..

I can not find the date of publication on any of your articles or comments. This is critically important information to assess how current the information and facts are, especially in the financial environment which chages so fast. A phrase like “last week….” does not help me understand time relevance.

Dennis – The date of the post is at the end of the post. For example this post says “Posted on June 15, 2009 under Banking and Credit Cards.” The date of the comment is listed with each comment. For example your comment shows “Dennis Sykes on November 28, 2011.”

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